Christopher C. Liu, Portfolio Manager
November 20, 2018
Last month, Compass Minerals International’s stock declined by nearly 28% after the company reported preliminary third quarter results indicating below-expectation production in its salt segment. Management indicated that the main culprit for the disappointing result was a slower-than-expected ramp-up in production at its low-cost mine in Goderich, following the installation of its new continuous mining systems; with a worker strike that just concluded in July, business results were affected by the need to retrain its workers to use the new equipment. We view the negative price action as a severe overreaction by the market, as our longer-term thesis of margin expansion within its salt segment coupled with higher prices during the upcoming winter season remains unchanged. That being said, the dividend as always will be an important guidepost as to what we ultimately decide to do with our shares. We are mildly concerned that management may deem it prudent to temporarily slash the dividend due to recently worsening cash flow coverage. However, if our thesis plays out sooner rather than later, we would expect free cash flow to significantly improve along with earnings, and for the dividend to eventually resume its historically upward trajectory. Regardless of what management decides to do, we believe the shares are currently significantly undervalued and present an attractive buying opportunity.